Let Glenstrata's trader not blinker its miner's vision

The London media are abuzz with the proposed merger between Glencore and Xstrata, the commodity broker and miner and the journos are full of whether it is a good idea to have traders and producers under one roof.

Either the media have forgotten what they once knew or they are being naive in the extreme – but probably they are both.

Glencore, formerly Marc Rich, floated in May last year on the LSE at 530p, a price which, other than for a few days after the IPO, it has not seen since. We should not forget that the only reason it was brought into the public market was so that it could be valued for the sole purpose of acquiring Xstrata, both of which live in PO Boxes a few kilometres from each other in the small Swiss towns Zug and Baar respectively which have an aggregate population of about 40,000, a quarter of that of the staff of combined companies.

Both are strong in their fields and there is no doubt there is plenty of synergy to be found in the joint unit. Fear of having producers and traders in the same group? How about the oil companies, the largest of which all have upstream and downstream businesses living happily together – to the outside at least – and which compete at all levels.

Sure, during and long after the oil crisis of 1973 there was much moaning about the excessive power of the “Seven Sisters”, the group comprising Anglo-Persian Oil Company (now BP), Gulf Oil, Standard Oil of California (Socal), Texaco (now Chevron), Royal Dutch Shell, Standard Oil of New Jersey (Esso) and Standard Oil Company of New York (Socony) (now ExxonMobil), in other words the large global operators, but in the meantime that industry has consolidated further and the world has not come to an end as a result.

The oil guys were as hated in the 70s as bankers were in the naughties and without a doubt the commodity traders will be in the coming decade. Anyhow, I see nothing scary in a £70bn combination of the two, still of lower market value that global economic powerhouse and unremitting contributor to growth and wealth creation, Facebook.

However, I do have one fear and one which I expressed at the time of the Glencore IPO, namely that trading is a very short cycle business whereas mining and extraction is highly long cycle. The skills required to make the two work are very different and I fear that if Glencore management has the upper hand it will lack the experience and ability to correctly manage the extraction business.

It is easier for miners to give traders their head than the other way around. Handing the joint company to those of a traders’ instincts smacks to me a bit of putting the lunatics in charge of the asylum.

On Greece: It reminds me of a Rubik’s cube which every time they get it done, they don’t like the picture they see and so they break it down again

Nevertheless, commodities are trumps and as long as China continues to suck them in at the rate of knots, any investment portfolio which does not hold a decent exposure to at least one of the big guys like BHP, Anglo-American or the new “Glenstrata” will be in trouble.

The great commodity poker game

However, the high valuations are based on continuing demand from the Sino-Asian region. Should the forecast European recession really kick in and should global consumer demand subsequently stagnate on the back of it, then China could slow and with it the great commodity poker game may rather quickly flip from flush to slush.

I am not trying to say that this will happen in the short term, but the risks are there and they need to be priced in. As mining and extraction investment cycles are generally much longer than normal economic cycles, I would prefer to hand my cash to companies where the weighty decisions are in the hands of those who have long-cycle thinking in their DNA; I’m not sure that that will be the case in a merged “Glenstrata” – or at least not for the next 10 years.

Meanwhile, the insoluble problem that is Greece

Meanwhile, Greek indecision rumbles on with the Hellenic politicians dithering and the Merkozy bunch dreaming up new to solutions to an insoluble problem. It reminds me of a Rubik’s cube which every time they get it done, they don’t like the picture they see and so they break it down again.

If Greece were a company, it would long be in administration, the politicos as directors would all be in gaol for trading in insolvency and if the eurozone powers were bankers, they’d all have been fired with the EFSF, the bonus pool, being returned to shareholders

The latest Franco-German proposal is for the cash not to be paid out to the Greeks but to be committed in escrow and only disbursed if, as and when Athens fulfils it obligations under the terms of the bailout package. Problem solved? No. Problem postponed again. If Greece were a company, it would long be in administration, the politicos as directors would all be in gaol for trading in insolvency and if the eurozone powers were bankers, they’d all have been fired with the EFSF, the bonus pool, being returned to shareholders. But it’s not a company, they are not directors and bankers and the bonus pool remains intact. Meanwhile, we are being told that there will be a solution by the weekend. Again?